Opinion Piece: Finance and the Post-2015 Agenda

There is almost no dispute that the worst performance of all Millennium Development Goals (MDGs) was registered on MDG 8, the Global Partnership for Development. The impending deliberations to shape the post-2015 development agenda offers a high level political opportunity to correct that imbalance.

For that, it is important to avoid treading the same path of the MDG approach. The initial blueprint for the MDGs entirely neglected mention of the means of implementation necessary in the form of international support. Since it was clear that developing countries would never get on board with an agenda that would harshly judge their progress in improving certain quantifiable indicators without correlative commitments of financial support to help achieve them, one more goal was added, and this was Goal 8 on the Global Partnership. Accepting this approach condoned the methodological nonsense of putting means of implementation as a category equivalent to the goals they should serve. It condemned finance for development to the constraints of a format that required simplified, succinct, one-size-fits-all statements that could never capture the breadth, complexity and diversity needed for development finance to work.

This was a strategic mistake of giant proportions that, going forward, should be avoided. Means of implementation should not be distorted into an autonomous “goal,” which will leave out entire areas and nuances of finance, just as they were left out of MDG 8. They should be compiled into a Plan of Action, which includes key issues and means of implementation to carry them out, and become an inextricable component of the post-2015 development agenda, together with the sustainable development goals. An important consequence of this will be that examination of performance on the goals will not be separable from assessment of performance on delivering on means of implementation. In what follows this article offers thoughts on the key areas such Plan of Action could cover.

Financial regulation and the international monetary system

Financial regulation and the reform of the international monetary system should be the first order of priority in an agenda to finance sustainable development goals. Without getting financial regulation right, it will be difficult to make any other financing work in the post-2015 agenda. If anybody has doubts of this, one just has to examine the extent to which the global financial crisis has rarefied the whole development finance discussion in the last five years. Financial regulation is relevant for financing sustainable development in two ways. First, the behavior of financial actors holds tremendous sway on what happens in the rest of the economy. This trend has only intensified in the last three decades as the relative importance of finance in the economy has grown. This has not been for the better, unfortunately, with a large part of that growth attributable to transfers within the financial sector itself, oftentimes result of the creation of paper profits. The first priority in financing transformation is to move from finance-driven development to sustainable development-driven finance. Second, financial crises have the potential to offset any development gains achieved with other means. Financial regulation cannot stop crises from happening. But it can make them less severe, and ensure that their impacts are more fairly distributed, and it should aim to do so. In particular, financial regulation has a crucial role to play in safeguarding public resources. It can do that by establishing appropriate mechanisms for winding down financial companies that become insolvent without threatening the provision of vital banking services. This way, the crisis of anyone banking institution, no matter how big or interconnected, does not become the crisis of the whole banking system.

With regards to the reform of the international monetary system, it is key to enable the mobilization of resources for development. The monetary system we have is prone to building up excessive imbalances that can only be adjusted via recessions. Assuming that a new development agenda will be job-creating and place decent work at its center, this cannot happen within substantial reforms of the monetary system.

The system also exacerbates exchange rate fluctuations, which hurt disproportionately developing countries and fails to realize the potential of tools that already exist in the system, such as the Special Drawing Rights, for generating funding for development and climate. The reforms in the system need to establish a credible form of coordination between deficit and surplus countries, support for countries that use capital flows management measures and a transition path towards use of an internationally used reserve and trading currency that is not the domestic currency of any country, but a supranational one. Special Drawing Rights, with some changes to the rules on allocation and use, could be a proxy for that currency during a transition period.

Simultaneously, strengthening what is an emerging set of regional monetary and financial cooperation mechanisms could provide a more diversified system, and therefore less susceptible to the shocks to a single currency or region. Sovereign debt

Debt is re-emerging as a threat to financing development. The generalized impression that the debt relief initiatives of the late 1990s and early 2000s took care should be contrasted with a reality check. Determinations of debt sustainability have become increasingly lax, so as to avoid calling unsustainable the growing levels of debt that, in many countries, represent an impairment to required expenditures on human development objectives.

From a structural point of view, the failure to set up a predictable rules-based mechanism for the orderly, timely and efficient resolution of sovereign debt crises, be they in low, middle or high, income countries, continues to haunt the global economy. As the International Monetary Fund recently acknowledged, instances of debt restructuring continue to yield relief that is “too little, too late.” But this is what general bankruptcy theory tells us can be expected in a framework where decisions on debt sustainability and debt reduction are creditor-driven. Likewise, the lack of discipline on creditors – the chances that they will take losses when credit decisions go wrong —are very low, meaning that irresponsible lending is a common occurrence. Entire countries, and the poorest within them, usually, end up paying the cost of this continued gap in the international financial architecture.

Mobilization of domestic resources

Mobilization of domestic resources went from being almost ignored at the time the MDGs were adopted to being rightly recognized as the cornerstone of good financing for development practices. There is a generalized consensus on the benefits that reliance on domestic resources brings regarding strengthening accountability to citizens, self-determination and space for nationally-owned development strategies.

That there is consensus on these aspects does not mean that there is no role for policy action in the new development agenda. In fact, billions are lost each year in developing countries through tax evasion and tax avoidance due to systemic and deliberate minimization of the tax share of companies and wealthy individuals. A financing post-2015 framework could be the venue to agree on removing the constraints to mobilizing those resources posed by lack of transparency on beneficial ownership of companies, transfer pricing abuse and double-taxation treaties. Some taxation principles that put developing countries at a disadvantage in terms of collecting revenue for activities in their territory require revisiting in a forum with the full participation of those countries. For this the post-2015 framework could agree on strengthening the UN Committee of Experts on International Cooperation on Tax Matters to an intergovernmental body.

Private sector finance

The private sector will also have to play a role in financing the new development agenda, but it has to be within a framework that recognizes, as a point of departure, the diverse set of stakeholders that constitute the private sector, from the informal self-employed, to cooperatives, small and medium enterprises and large transnational corporations. So far, however, due to their resources and weight, only the latter are adequately represented in UN discussions on the new development agenda.

Forgetting that the primary motivation of private companies is to maximize shareholders’ profits, not serve the public interest, may be a recipe for the type of sour surprises that countries, developed and developing, had the chance to encounter in their own experience in over three decades of opening essential services to private participation. Ensuring that private companies finance development will not come as a natural impulse to them, but as a result of careful and effective governance, regulations and accountability frameworks. Where those are absent, it is unlikely that the private sector will magically make up for them, and can, on the contrary, deepen existing governance problems.

Infrastructure is a typical area where these tensions are playing out. Several studies claim that institutional investors have trillions of dollars in savings that need to be invested long term and that infrastructure projects offer a great investment opportunity that matches that need, if only host countries could offer deals that are “well-structured” and a “good investment climate.” The glitch in this narrative is that institutional investments will flow where high risk-adjusted returns can be made. Since the case for infrastructure offering such returns on its own is very fragile, one wonders whether the “well-structured” deals and the “good investment climate” are not euphemisms for legal and contractual arrangements that will legally transfer more risks to users and taxpayers in host countries.

In fact, there is a good deal of evidence that Public-Private Partnerships (PPPs) can lead to such results. One reason studies have found why countries pursue PPPs instead of public projects is that the former can more easily conceal fiscal risks and bypass the normal accounting frameworks that a publicly-funded project would have to go through. An example of how such controls are bypassed is that private concessionaries often demand that risks be covered via public guarantees that become, therefore, contingent liabilities on the public budget (for instance, the government guarantees certain minimum consumption by users). Contingent liabilities, unlike other fiscal liabilities, tend to be excluded from public scrutiny via the normal institutional mechanisms that help to rationalize other government expenses. In situations of poor institutional quality, the opportunities for ill-advised, over-reaching and damaging guarantee commitments on the part of the government increase.

But risks can be shifted away to taxpayers and users in other ways, too. Public private partnerships usually require upfront fiscal incentives and transfers from the host government. They impose costs in the form of foregone revenues from levying tariffs or user fees. In addition, private operators are prone to under-invest, and may impose pricing conditions that cut the access of the lowest-income segments to infrastructure, forcing the state to step in to subsidize investment and provision.

Official Development Assistance

The ongoing deliberations provided occasion to listen to several participants already repeat that Official Development Assistance will not be a central element in the new development agenda. One could cynically view these assertions as a shameless attempt by donor countries to go back on their promises of increasing aid (in many cases to 0.7 % of GNI target). While remaining vigilant that this does not happen and ensuring that evolving methods for counting development aid do not serve as a device to “cook” the numbers or pass as aid subsidies for private companies to expand markets, displacing the focus from aid may have some healthy effects on the discussion on development finance. One of the criticisms levelled at the MDGs was, after all, that they were embedded an excessively aid-centric vision of development. And this is no surprise. The whole MDG agenda started as a project in the last 1990s by donor agencies concerned that in a post-Cold War environment, traditional aid was losing support in electoral and political circles in their countries.

The focus on aid served, in fact, to hide and divert attention from sources with much more systemic impact on financing development. Taking a broader focus than just aid may provide an opportunity to meaningfully revisit them. In 2015 the international community has the historical chance to chart an ambitious and transformative agenda that truly pays heed to the tridimensional nature of sustainable development: economic, social and environmental. But leaders should not forget that the ambition and transformative power of the agenda will only be as real as the means of implementation offered to support it. Aldo Caliari is Director of the Rethinking Bretton Woods Project. He has focused on linkages between trade and finance policy, global economic governance, debt, international financial architecture and human rights in international economic policy.